Investment Highlights

• We maintain our BUY call on Telekom Malaysia (TM) with an unchanged DCF-based fair value of RM7.10/share based on a WACC of 6.2%, terminal growth rate of 2% and neutral ESG rating of 3 stars. This implies an FY21F EV/EBITDA of 7.4x, which is 43% below Maxis.

• Our FY21F–FY22F earnings are unchanged as TM’s 1HFY21 core net profit of RM586mil (+15% YoY) came in within expectations, accounting for 55% of our and 52% street’s FY21F net profit.

• This lies in 1H’s highest range of 41%–52% over the past 3 years, which tends to be skewed by lumpy indefeasible rights of use (IRU) contract sales. Also, the group declared a slightly higher interim dividend of 7 sen (+3% YoY).

• YoY, 1HFY21 operating costs rose 6% YoY to RM3.5bil from higher voluntary separation schemes and staff benefits for employees and depreciation (+5%).

• TM’s 1HFY21 capex rose 24% YoY to RM597m, translating to 11% of revenue vs. 9% in 1HFY20. As management still maintains its FY21F capex/revenue ratio of 14%–18%, we expect an escalation of spending over the next 2 quarters.

• Our forecasts are in line with management’s unchanged FY21F guidance for a flat to low single-digit revenue increase, EBIT of over RM1.6bil and cape- to-revenue ratio of 14%–18%.

• QoQ, TM’s 2QFY21 revenue slid 2% to RM2,763mil on lower IRU contract sales while TM One’s customer projects were slowed down by movement restrictions. This was partly offset by higher unifi accretion.

• Together with 2QFY21 operating expenditures rising by 10% QoQ from higher workforce restructuring and staff benefits, normalised EBITDA decreased by 9% to RM1,028mil.

• Exacerbated by a 5% rise in depreciation and 6ppt increase in effective tax rate to 26%, 2QFY21 core net profit dropped by 23% QoQ to RM255mil.

• The group’s 2QFY21 fixed broadband subscribers rose by 112K QoQ, driven by a strong 188K increase in unifi users to 2.1mil that was partly offset by a 76K decline in Streamyx to 416K. This was another record increase in unifi users, 8.5x of Maxis’ 22K.

• 2QFY21 average revenue per user (ARPU) slid by RM3/month QoQ to RM141/month for unifi from lower-entry subscriptions while Streamyx was flat at RM91/month.

• Given TM critical role in Malaysia’s MyDigital Initiative with its ownership of the High-Speed Broadband network, we expect a faster pace of growth for its wholesale revenue beyond FY21F. Likewise, TM One’s revenue growth could also be accelerated by the group’s appointment as the sole Malaysian cloud provider for government data.

• The stock currently trades at an attractive FY21F EV/EBITDA of 5x vs. Maxis’ 12x.

Source: AmInvest Research - 30 Aug 2021